ABSTRACT
Introduction The employment relationship and the welfare state are intricately linked. 1 Formal employment is the welfare state’s main source of funding. The main share of income taxes derives from formal employment and in many countries the welfare state is funded by additional payroll taxes. Entitlements to social transfers as well as social insurance are tied to formal employment relationships. In particular, pension schemes and unemployment insurance schemes are generally designed for employees rather than for all citizens. In turn, the welfare state shapes the labour market by providing employees with different kinds of skills, education and protection. The level of transfer payments and their conditionality on length of employment and job seeking behaviour infl uence the way individuals are integrated into the labour market. If transfer payments are too high, labour market participation might be low; if they are too low, investments in skills might go down because individuals may not be able to bear the costs of training. Social policies and labour market policies are all centred around the way private business hires, trains and employs staff.
